Headlines – Week of May 22, 2011

June 2, 2011

As the market for primary home becomes more affordable, a growing number of articles focus on the increasing rental market. This week’s Headlines focuses on the frequent number of articles devoted to this recent trend.

Cities See Rise in Rental Homes

A recent article in USA Today describes the rising share of homes that are rented rather than owned. More than 500 midsize and large cities have seen a rise in this trend.

Almost 4 million homes have been lost to foreclosures the past five years, turning many former owner-occupied homes into rentals.

According to many economists, the shift to rental housing is potentially long lasting and portends changes for neighborhood stability and how people build wealth.

Moody’s Analytics believes this trend is big but will more at a “glacial” pace although the swing from owner- to tenant-occupied homes in the past decade has been dramatic in some places.

Of the 100 largest cities, some of those with the largest shifts were Irvine, Calif., which went from about 40 percent of occupied homes rented in 2000 to 49.8 percent in 2010; Philadelphia increased from 40.7 percent to 45.9 percent; and Birmingham, Ala., rose from 46.3 percent to 50.7 percent.

Twenty-five cities including Baltimore, Minneapolis, Sacramento and Salt Lake City swung from having more than half of homeowners in 2000 to majorities of renters in 2010. In Reading, Pa., 57.6 percent of occupied homes were rentals in 2010, up from 49 percent in 2000.

Florida, California and Arizona had the most cities where the share of renter-occupied housing grew by at least 5 percentage points. All three states have been hit hard by foreclosures.

Nationwide, 34.9 percent of occupied homes were rented in 2010, up from 33.8 percent in 2000.

According to the Harvard University’s Joint Center for Housing Studies, the renter household market had remained fairly stable from 1990 to 2006.

Since 2006, when housing prices peaked, the number of renter households in the U.S. has grown an average of 692,000 a year, while owner households have fallen an average of 201,000 a year, according to recent Census surveys.

According to a study prepared by Harvard’s Joint Center for Housing Studies, a growing number of Americans can’t afford a home or don’t want to own one, a trend that’s spawning a generation of renters and a rise in apartment construction.

Many of the new renters are former owners who lost homes to foreclosure or bankruptcy. For others who could afford one, a home now feels too costly, too risky or unlikely to appreciate enough to make it a worthwhile investment.

The proportion of U.S. households that own homes is at its lowest point since 1998. When the housing bubble burst four years ago, 31.6 percent of households were renters. Now, it’s at 33.6 percent and rising. Since the housing meltdown, nearly 3 million households have become renters. At least 3 million more are expected by 2015, according to the report.

Nearly 38 million households are renters.

Among the signs of a rising rental market:

· The pace of apartment construction has surged 115 percent from its October 2009 low. It’s still well below a healthy level. But permits for apartments, a gauge of future construction, hit a two-year peak in March. By contrast, permits for single-family homes are on pace for their lowest annual level on records dating to 1960.

· The number of completed apartments averaged about 250,000 a year before the boom. They fell to 54,000 last year and will probably number around the same this year. But according to the CoStar Group, the number will likely double to about 100,000 in 2012 and hit 250,000 by 2013 or 2014,. The lag is due to the time it takes for an apartment building to be completed: an average of 14 months.

· Demand is driving up rents. The median price of advertised rents rose 4.1 percent between the end of 2009 and the end of 2010, census data shows. Few expect the higher prices to stem the flood of renters, though. One reason: Younger adults don’t value homeownership as earlier generations did and many prefer to rent, studies show.

· Rental housing is giving builders more work just as construction of single-family homes has dried up. Still, that economic lift won’t make up for all the single-family houses not being built. Apartments account for only about one-fourth of homes. And renters are outspent roughly 2-to-1 by homeowners, who pay for items from lawn care to remodeling that helps drive the economy.

According to Moody’s Analytics, before the housing bust, mortgage rates were so low it was often cheaper to buy than rent. That was true a decade ago in more than half the 54 biggest metro areas. Today, by contrast, it’s cheaper to rent in about 72 percent of metro areas.

Many younger Americans see owning as risky. It hardly seems the best way to build wealth, especially when prices are falling.

From the 1940s until 2007, homes appreciated an average of nearly 5 percent a year, adjusted for inflation. In the past four years, the median price of a single-family home has sunk 37 percent, by $57,500, to its lowest since 2002. Yet in some areas, owning is still too expensive for many.

With larger downpayments and tighter credit, we are creating a renter’s nation as it becomes difficult for most Americans to afford a home. Many now see the home as a burden, not an investment.

According to the real estate research firm, RealtyTrac, U.S. banks and money lenders now own 872,000 homes, a number that could more than double in the coming years.

The current number of properties owned by banks and lenders is nearly double what they owned in 2007, before the housing market began to collapse.

Lenders frequently sell homes at a substantial discount and economists expect it will take three years for lenders to sell the properties they have taken over.

That means for the next three years at least, the sale of so-called distressed homes will continue to slow a recovery in the housing market.

According to Moody’s Analytics, the distressed housing market remains a heavy weight on the banking system and prices are going to fall some more.

Moody’s has predicted home values could drop an average of 5 percent by the end of 2011 before making a slight comeback in 2012.

A separate real estate research firm, Trepp, said lenders could lose $40 billion by selling homes at discounted prices.

Buy vs. rent: These days, buying wins

According to an article in CNNMoney, for the first time in years, buying a home may beat renting.

The article relies on a paper to be published in Real Estate Economics by Ken Johnson of Florida International University and Eli Beracha of East Carolina University.

Two factors contribute to this trend. First, rents, though mostly stagnant the past few years, are expected to head higher as more people bitten by the housing bust turn to renting.

Second, home prices have finally dropped enough to create a buying opportunity, as prices are down 32%, nationally from their peak in 2006.

The net result is that home price gains would need to average only 3.25% annually to beat renting. According to the authors an owner would have to stay in the home for at least eight years in order to make the math work.

The authors compared the cost of owning with the cost of renting and buying typically leads to higher monthly and annual bills once all costs are factored in — mortgage payments, property taxes, maintenance and transactional costs.

While the higher costs can be offset if the home gains in value, however the authors assume the renters can invest their savings. This was a big part of why the authors say renting has typically been the better deal.

Homeownership has dropped to 66.4% from a peak of 69.1% in 2005, according to the Census Bureau.

Of the 23 cities the report looked at, Seattle is the best place to buy right now. When renters invest in portfolios that include stocks, the appreciation rate required over the next eight years there is 4.84% and the area’s historical average is 6.06%.

For several cities, including New York, Boston and Dallas, renting is still preferable. In New York, for example, homeowners would need a 7% annual rise in home values to beat renters.

The report cautions buyers to questions the assumption that home prices will rebound. The potential for many more foreclosures that could flood the market with distressed homes will continue to depress prices.

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